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Limits of Arbitrage: Theory and Evidence from the Mortgage‐Backed Securities Market
Open accessAbstract
“Limits of Arbitrage” theories hypothesize that the marginal investor in a particular asset market is a specialized arbitrageur rather than a diversified representative investor. We examine the mortgage‐backed securities (MBS) market in this light. We show that the risk of homeowner prepayment, which is a wash in the aggregate, is priced in the MBS market. The covariance of prepayment risk with aggregate wealth implies the wrong sign to match the observed prices of prepayment risk. The price of risk is better explained by a kernel based on MBS market‐wide specific risk, consistent with the specialized arbitrageur hypothesis.
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Shleifer, A., & Vishny, R. W. (1997) · The Journal of Finance · doi:10.1111/j.1540-6261.1997.tb03807.x · Cited by 5,291
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Metadata
- Authors
- GABAIX, X., KRISHNAMURTHY, A., & VIGNERON, O.
- Venue
- The Journal of Finance
- Publisher
- Wiley
- Published
- 2007-03-20
- Volume
- 62
- Issue
- 2
- Pages
- 557-595
- ISSN
- 0022-1082 (ISSN-L)
- 1540-6261
- OpenAlex
- W3121703571
- Cited by
- 295
- References
- 1
- FWCI
- 28.93
- Type
- journal article
- Language
- en
- Open access
- bronze
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- GABAIX, X., KRISHNAMURTHY, A., & VIGNERON, O. (2007). Limits of Arbitrage: Theory and Evidence from the Mortgage‐Backed Securities Market. The Journal of Finance. https://doi.org/10.1111/j.1540-6261.2007.01217.x
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Contains information from the Semantic Scholar Academic Graph Datasets, made available under the ODC Attribution License (ODC-BY 1.0).
Semantic Scholar’s data is described in: Kinney, R., et al. (2023). The Semantic Scholar Open Data Platform. arXiv:2301.10140.
